Term Sheet is an agreement that lays down the summary of terms and conditions of a proposed investment, deal or transaction. It usually acts as a guideline for the parties as to their roles, responsibilities and rights with regards to the investment. It usually acts as a starting point for a more detailed contract.
- First party
First party is usually a company, an organization, or any business entity where the investor or buyer wishes to make an investment.
Second-party is the Investor or buyer is someone who wishes to invest or purchase the shares or business of the First party. This can either be an individual or a Company.
Essentials of a term sheet
First party's business
A term sheet should mention details of the products and services being offered by the First party.
Role and responsibilities
It should lay down the roles and responsibilities of both parties.
It should include details like type of transaction, amount of investment to be made, number of shares exchanged, stake percentage, voting rights, etc.
Consideration and payment terms
It should specify the agreed consideration and should also mention who is responsible to make the payments, the timeline and mechanism for such payments, etc.
Terms and conditions
It should also lay down the terms and conditions or the do’s and don’ts of the parties with regards to the transaction.
Confidentiality and binding terms
It should place a confidentiality obligation on the parties receiving any sensitive information. It should also include a conditional term as to the parties responsibility to carry out the transaction without engaging in similar translations for a specified period of time.
It should specify the laws regulating the transaction and the parties. It should also mention the courts that shall have adequate jurisdiction in case of any disputes arising out of the agreement.
It should provide an opportunity for both parties to end or terminate the agreement with prior notice and in accordance with the agreed procedure.
Why do you need a term sheet?
- Clear communication
It helps with better communication of expectations, goals, and objectives and thus helps in clear expectation setting.
- Simple and liberal drafting
It is often a stepping stone for a more detailed, formal contract and thus there are no rigid requirements as to the clauses and structure of a term sheet. This helps save substantial amounts of time.
It allows you to decide its nature and implication upon other parties. If you wish to have something more than a guideline, if you wish to bring in some accountability and wish to include some binding terms, then you are free to do so by adding a few other clauses like dispute resolution and governing laws, legally binding intentions of the parties for such clause(s), etc.
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Are you one of these?
- An entrepreneur in talks with a prospective buyer
- A startup looking for investors
- An investor about to purchase the shares of a Company
- An investor looking to make a gainful investment
Do you relate to any of these statements?
- I have unique business model
- The terms and conditions for an investment in my First party are peculiar to my business